Setting up your general ledger (GL) in a way that reflects your unique business operations can save time and headaches down the road. The goal is to track profit center results and expenses without introducing unneeded complexity. You can accomplish this by properly structuring the three primary elements or dimensions of your general ledger:
Chart of Accounts
All these elements are interdependent when pulling and evaluating revenue, cost, and expense information. So, how should you think about setting them up?
It’s important you organize your chart of accounts to minimize data entry errors. How do you do that? Think about the following needs associated with pulling data from your financial system:
Sections. Start by clearly defining your account structure in sections. These sections include assets, liabilities, and equity for the balance sheet and revenue, costs, and expenses for the income statement.
Code. How you number your GL accounts within each section is also important. For example, when a vendor bill comes in, the coding for the bill should be easy to determine based on the nature of the bill.
This is where you slice and dice your income statement data. Use categories for two main purposes: tracking profit center results and tracking expenses.
It’s beneficial to think of tracking expenses by department or accountability. For example, your operations manager may have budget responsibility for both the installation and service departments, or the responsibilities may be separated between two individuals. Your organizational structure will dictate how you set up your GL categories.
Security alarm professionals rely on their ability to track profit center results for installations, services, and monitoring, so set up your categories accordingly. Segregate revenue and direct costs with profit center categories and also consider the need to track business from new clients separately from existing clients.
Here is one example of a common category structure:
Branches have an important role in the GL structure for four reasons: tracking results by geographical area, tracking results for separate legal entities, billing with different return addresses or company names, and tracking corporate overhead. Branches and categories together provide extensive slicing and dicing reporting flexibility.
Mistakes to avoid
Security alarm professionals tend to make three common mistakes when setting up their general ledgers:
They don’t have a simple, organized chart of accounts. A more detailed general ledger structure increases complexity in daily processes and opens the door for data entry errors. Proper use of branches and categories help keep your chart of accounts and general ledger simple.
They don’t make effective use of categories. Remember that categories are used for two purposes: tracking profit center results and department expenses. Identifying key lines of business and clearly defining organizational structure are essential when setting up categories.
They don’t utilize branches properly. It’s important to use branches to separate financial data for the purposes described above. Not doing so can create problems down the road.
A well-structured general ledger is essential to having the accurate financial picture you need for your security alarm business.